A new study by Realtor.com finds that some mortgage servicers are trying to force those who inherit a home to refinance the existing low-interest mortgage. In some cases, refinancing could double the monthly payments due.
This is despite a federal law that gives surviving spouses, adult children who inherit a family home, domestic violence survivors, or recently divorced parents with young children the right to inherit or assume the existing mortgage along with the home.
For those unfamiliar, servicers are the companies that manage mortgage accounts and collect payments each month. More often than not, that's a different company from the one that set up the loan in the first place.
Realtor.com uncovered the practice when it examined the complaints database of the Consumer Financial Protection Bureau (CFPB). It found over 200 examples of servicers denying access to mortgage accounts, blocking payments, or demanding the same documentation repeatedly.
A cynic might almost suspect that these practices were intended to stall the acceptance of payments until the company could foreclose on the home. Still, an alternative was on offer: refinance the loan to today's higher mortgage rates, giving up the uber-low rate associated with the existing loan.
What Does the Law Say?
The governing federal law is the Garn-St. Germain Depository Institutions Act of 1982. This permits "due-on-sale" clauses in mortgage contracts, which means that the loan must be repaid in full when the home that secures it is sold or transferred, according to Cornell Law School.
Cornell continues with exceptions to that rule:
Exemption of Specified Transfers or Dispositions
"With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon ...
A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety; a transfer to a relative resulting from the death of a borrower; a transfer where the spouse or children of the borrower become an owner of the property; a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property."
The Legal Aid Society puts it more succinctly: "If you inherit a home with a mortgage, you have the right to 'stay and pay.' However, rightful heirs often encounter difficulty when dealing with the mortgage servicer to obtain information about the mortgage loan or learning about their options as an heir."
What the Regulator Says
The CFPB identifies four risks to consumers:
- Pressure to refinance: Some homeowners say servicers have insisted that the only way to keep the property is to replace the current mortgage with a new loan at prevailing rates. This can leave borrowers facing a much higher monthly payment and worrying that they may no longer be able to remain in the home.
- Delays: Homeowners often describe lengthy processing times, poor communication, and repeated demands for documents they have already submitted. These setbacks can lead to financial and legal consequences, including increased attorney fees, conflicts with court-ordered divorce terms, missed refinancing opportunities, missed payments, and possible foreclosure.
- Refusals to release the original borrower from liability: Some servicers reportedly decline to remove a former borrower from the mortgage, even when the property has been awarded to another person through divorce. This can place the homeowner at odds with a court order and may jeopardize the terms of the original property settlement, despite evidence that the remaining homeowner can afford the loan.
- Safety risks to survivors of abuse: Survivors of domestic abuse report that servicers sometimes continue sharing mortgage information with an abusive former partner or require that person’s approval before updating the account. Those requirements may expose sensitive information and make it harder for survivors to protect themselves.
It's hard not to see all of these as outrageous breaches of the law. They aren't common, but they crop up often enough to have spurred the regulator to write one of its Issue Spotlights on the topic.
What Consumers Can Do
Consumers can and should enforce their rights under the law and resist pressure to refinance. However, doing so can be time-consuming and stressful, and may ultimately require the services of an attorney.
We suspect many mortgage servicers act inefficiently rather than maliciously. They can profitably collect loan payments, but the departments that deal with succession issues are expensive and generate little or no revenue. It would be no surprise if those departments were under-resourced and their staff members stretched to their limits.
Things may be different in some cases for refinances. Trying to wrongly force a successor to get a whole new mortgage can generate a lot of money for the company.
Realtor.com cites one complainant on the CFPB's website: "The only option they offered me was a refinance offer," the complaint said, adding that it "would have doubled the monthly payment and interest."
Practical Steps to Take
Of course, mortgage servicers are absolutely right to demand documentary proof that someone has a right to take on a mortgage under the Garn-St. Germain Act.
For someone who inherits a home from a deceased relative, that might include photo ID, a death certificate, a copy of the will that bequeaths the home, and a letter from the estate's executor(s) confirming that the beneficiary has inherited the property.
In other circumstances, after a divorce or as a domestic violence survivor, a court order and photo ID might suffice. But it's likely a sound strategy to provide the servicer with any document it requests.
The CFPB acknowledges that mortgage servicers often demand the same documents over and over. This may suggest inefficiency or stalling.
Either way, we would recommend always providing the requested documents, first as scans or photos via email or text and following up with hard copies by mail using the USPS's Signature Confirmation service. At the very least, a consumer will build a file of cooperative actions that should impress any judge — if the matter ends up in court.
It might also be worth sending links to the servicer of the Cornell and CFPB articles, following up with hard copies. That might dispel any hope the servicer has that it's dealing with someone who doesn't know his or her rights.
If one suspects that the servicer is trying to run out the clock so that it can foreclose on the property, and it's refusing payments, it may be a good idea to make on-time payments into a new savings account of one's own. Name the account "delayed mortgage payments."
That will demonstrate to the foreclosure judge that the reason the loan went into default was the servicer's blocking of payments. One will also have the ability to catch up with payments once they're unblocked.
Keep in mind, however, that this strategy provides only supporting evidence, particularly when paired with bank statements and records of attempted payments. You would still need documentation showing that complete payments were offered and rejected. Ultimately, anyone facing imminent foreclosure would be best served by seeking guidance from an attorney familiar with the applicable state and local laws.
